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Lessons from a Comparison of U.S. and U.K. Insolvency Codes

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  • Franks, Julian R
  • Torous, Walter N

Abstract

The paper describes two insolvency codes, those of the United Kingdom and the United States, and appraises their efficiency using five criteria, including (1) premature and deferred liquidation, (2) adherence to the terms of the debt contract, (3) direct costs of insolvency, (4) over or under investment, (5) other stakeholders interests. The principles underlying the two systems differ in some fundamental respects. The main objective of Chapter 11 of the 1978 U.S. Bankruptcy Code is to maintain the business as a going concern, even if that reduces the proceeds available to creditors. As a result, the code has been deliberately designed to be highly debtor-oriented. In contrast, the main objective of the U.K. Code is the repayment of creditors' claims. As a result, the U.K. has had, at least prior to 1986, a highly debtor-oriented code. The paper examines the main features of each code which give rise to these assertions. Copyright 1992 by Oxford University Press.

Suggested Citation

  • Franks, Julian R & Torous, Walter N, 1992. "Lessons from a Comparison of U.S. and U.K. Insolvency Codes," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 8(3), pages 70-82, Autumn.
    • Handle: RePEc:oup:oxford:v:8:y:1992:i:3:p:70-82
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    Cited by:

    1. Cornelli, Francesca & Felli, Leonardo, 1997. "Ex-ante efficiency of bankruptcy procedures," European Economic Review, Elsevier, vol. 41(3-5), pages 475-485, April.
    2. Kahl, Matthias, 2001. "Financial Distress as a Selection Mechanism: Evidence from the United States," University of California at Los Angeles, Anderson Graduate School of Management qt0dg192r9, Anderson Graduate School of Management, UCLA.
    3. Agrawal, Ashwini & Gonzalez-Uribe, Juanita & Martinez-Correa, Jimmy, 2020. "Measuring the ex-ante incentive effects of bankruptcy reorganization procedures," LSE Research Online Documents on Economics 118908, London School of Economics and Political Science, LSE Library.
    4. Agrawal, Ashwini & González-Uribe, Juanita & Martínez-Correa, Jimmy, 2022. "Measuring the ex-ante incentive effects of creditor control rights during bankruptcy reorganization," Journal of Financial Economics, Elsevier, vol. 143(1), pages 381-408.
    5. Agrawal, Ashwini & Gonzalez-Uribe, Juanita & Martinez-Correa, Jimmy, 2022. "Measuring the ex-ante incentive effects of creditor control rights during bankruptcy reorganization," LSE Research Online Documents on Economics 110482, London School of Economics and Political Science, LSE Library.
    6. Alessandro Penati & Luigi Zingales, 1997. "Efficiency and Distribution in Financial Restructuring: The Case of the Ferruzzi Group," CRSP working papers 466, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    7. Gary Cook & Keith Pond, 2006. "Explaining the choice between alternative insolvency regimes for troubled companies in the UK and Sweden," European Journal of Law and Economics, Springer, vol. 22(1), pages 21-47, July.
    8. Iraj Hashi, 1995. "The Economics of Bankrupcy, Reorganisation and Liquidation: Lessons for East European Transitional Economies," CASE Network Studies and Analyses 0041, CASE-Center for Social and Economic Research.
    9. Longhofer, Stanley D., 1997. "Absolute Priority Rule Violations, Credit Rationing, and Efficiency," Journal of Financial Intermediation, Elsevier, vol. 6(3), pages 249-267, July.
    10. Ang, James S. & Fatemi, Ali M., 1997. "Personal bankruptcy costs: Their relevance and some estimates," Financial Services Review, Elsevier, vol. 6(2), pages 77-96.
    11. Ewa Balcerowicz & Iraj Hashi & Jens Lowitzsch & Miklos Szanyi, 2003. "The Development of Insolvency Procedures in Transition Economies: a Comparative Analysis," CASE Network Studies and Analyses 0254, CASE-Center for Social and Economic Research.

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